What is a project?

What is a Project?
1. A piece of work planned to achieve a
particular aim.
2. A temporary endeavour to achieve some
specific objectives in a defined time at
budgeted cost.
3. An investment made on a package of time-
bound activities.
4. Needs Resources or Inputs
5. Converts inputs to outputs by a process of
implementation.
 Examples of projects.

1. Construction of a house, road, bridge

2. Performing a marriage.
3. Overhauling a machine.
4. Maintenance of equipment.
5. Commissioning of a factory.
6. Research on new technology.
7. Conducting a war.
8. Planning for preventing a riot.
9. Constructing a power plant/ dam
What do each of the above involve?
 Mumbai Pune Expressway
Features
• India’s first six lane high speed access
controlled tolled espressway.
• Spanning 93 KM it connects Mumbai, the
financial capital and Pune, the neighbouring
industrial hub city.
• Cost of Rs. 1500 crores and completed in 24
months
• Four lane wide tunnels at 5 locations, totaling
5700m,with modern facilities for ventilation,
lighting and fire fighting vehicles.
 Mumbai Pune Expressway-Benefits
Many aspects of the Expressway make it an
engineering marvel.
• No signals along the 93km route and no blind
curves.
• Reduction in accidents.
• Reduction in travel time.
• Saving in fuel consumption.
• Faster crossing of Khandala Ghat
• Reduction in pollution.
 Mumbai Pune Expressway-Issues
• Mountainous terrain.
• Hard rock on the mountains made drilling of
tunnels extremely difficult.
• 500 trees to be uprooted and replanted.
• Rich, fertile land had to be cleared , into
farmland in interior areas.
• Difficulty in accessing work areas to supply
raw materials.
• Nature of soil, forced concrete roads.
• Environmental Concerns
 Reasons for success of Expressway
• Manpower from PWD and CIDCO, who had
experience in development of large-scale
projects. Revenue Dept. for land Acquisition.
• Appointment of Project Management
Consultants for technical requirements, cost
estimates, tender documents and supervision
of construction work.
• Various facilities given by MSRDC to consultants
and contractors.(next slide)
• Proactive stand towards litigation. Experts
appointed.
 Facilities given by MSRDC to consultants and
contractors.
• PMC had their own site offices with
equipment like xerox, telephone ,printers
provided by MSRDC.
• Increase in the price of steel, bitumen, cement
will be absorbed by MSRDC.
• Customs duty reimbursed for import of new
machinery.
• Land provided for site facilities was given to
contractors free of cost.
Facilities given by MSRDC to consultants and contractors .

• As the stretch of construction was 93km long

MSRDC prompted oil companies to set up
petrol pumps.
• MSRDC took the responsibility to divert all
utility services like telephone cables, water
pipelines and electrical lines coming in the
construction stretch.
As a result of above facilities, cost of the project
was reduced by 8-10% , due to speedy
completion of work.
 Litigation
• MSRDC adopted a very proactive stand
towards litigation right from the start and
appointed a panel of exerts for handling cases.
They also made sure they responded to court
orders promptly which helped reduce delays.
 Special features of the contract.
• Payment of price variation as per a
predetermined formula linked to price indices.
• Forex fluctuations for purchase of construction
equipment by contractors would be borne by
MSRDC
• Provision for payment of bonus to contractors for
early completion at the rate of 20 lakh per week /
penalty or delay 30 lakhs per week.
• Timely payment of bills guaranteed.For delay
beyond 10 days, 15% interest to be paid.
• Mobilization advance and machinary advance
paid.
Section Length Est. Cost(CR) Actual PMC Contractor
(KM) cost(Cr)
Kon To 13.23 127.33 136.82 Stup Consultants IJM/SCL JV
Chowk
Chowk 16.63 195.05 194.00 Intercontinental Hindustan
to Consultants Construction.
Adoshi
Kusgaon 23.00 177.46 163.56 Frishmann Prabhu Larsen & Toubro
to
Ozarde
Ozarde 16.15 132.70 133.47 Owen Williams Jog Engineering.
to Dehu
road.
Ghat
Section
Adoshi 7.13 86.46 93.15 Consulting Engg. Shapoorji Palonji
to long Services
tunnel
Section Length Est. Cost(CR) Actual PMC Contractor
(KM) cost(Cr)
Long 8.28 108.96 104.35 Consulting Engg. Larsen & Toubro
Tunnel Services Ltd.
to
Lonavla
bypass
Panvel 8.20 108.00 88.89 Technogram PBAC-PCEC JV.
Bypass, Consultants
part 1
Panvel 1.55 64.50 49.99 Technogram M.Venkat Rao
Bypass, Consultants
part 2
Tunnel 5.724 200.00 200.00 Konkan Railway
work 5 Corporation
twin
tunnels
Total 1200.46 1164.23
Others 324.00
 Project Management
• A project is a collection of complex non-
routine activities, that must be completed
with a set amount of resources and within a
set time limit.

• Project management deals with planning,

scheduling, controlling and monitoring
complex non-routine activities that must be
completed to achieve predetermined
objectives.
 Project Management
• A dynamic process that utilises appropriate
resources in a controlled and structured
manner to achieve some clearly defined
objectives identified as strategic needs. It is
always conducted within a defined set of
constraints.
Fundamental Project Management Process
1. Project Conception.
2. Project Definition.
3. Project Planning.
4. Project launch and execution.
5. Project Closure.
6. Post Project Evaluation.

Each stage must be closed before starting the

next stage. This ensures that decisions are taken
at the right time.
 Project Management Process

R BUSINESS CONCEPTION S
I CASE T
S A
K DEFINITION K
E
H
M PLANNING O
A L
N LAUNCH/EXECU D
A TION E
G R
E
M CLOSURE M
E G
M POST PROJECT M
T EVALUATION T
 Project Conception
Basically means selecting the project out of several
ideas. Following are the steps involved.
• Will it maximise profits?
• Will it maintain and improve market share?
• Will it maximise utilisation of existing resources?
• Will it maximise utilisation of existing capacity?
• Will it boost company image?
• Will it increase risk?
• Is it within the company’s current skills and
experience?
 Project definition.
We must express briefly in realistic terms, what the
project is about and what it has to achieve.
• What are the project origins(need/opportunity)
• Why is it neccessary now?
• What are the benefits to customers and the
organisation?
• What is the expected cost?(Budget)
• Current timescale and expected deadlines.
Subject to detailed planning later.
 Project Planning

The most important part of project management. It

is the heart of the matter. It is about creating order
out of chaos and asking questions.
• What needs to be done?
• Who is going to do it?
• When is it to be done?
• What equipment and resources are required?
• What is not going to be done?
Planning converts contents of the project definition
document into a time based detailed action plan.
 Project Planning(contd.)
Why do we carry out project planning?
• Identify everything that needs to be done.
• Minimise risks and uncertainty to a minimum.
• Establish standards of performance(KPI).
• Provide a structured basis for executing the
work.
• Establish procedures for effective control.
• Obtain required outcomes in minimum time.
 Launch & Execution
• Validate all promises of resource availability and
confirm the reporting and communication
process.
• What has been completed.
• What has not been completed and why.
• What is being done about incomplete work.
• What problems remain unsolved and what needs
to be done.
• What difficulties are anticipated.
• Are costs under control.
 Closure & Evaluation.
Review the project and identify what went well.
• Are agreed deliverables completed.
• Are all tasks completed.
• Is testing completed.
• Are training materials ready.
• Is equipment installed and operating.
• Are documentation/manuals ready
• Are process procedures finished and tested.
• Is staff training done.
 What is a feasibility study ?
• Feasibility study is a way to evaluate the
practicality and desirability of a project. Before
a company invests time and money into a
project, they need to know how successful the
project will be. The purpose is to provide
information and analysis on whether or not a
course of action should be pursued
 Feasibility Report
• Good planning is a pre-requisite for survival and success
of any business.
• Feasibility Report is a base document for investment
decision-making.
• Examines the profitability, feasibility and effectiveness of
a proposed investment opportunity. Should be prepared
before one undertakes any business or expands the
existing one.
• Presentation of Alternatives.
• Based on FR, a decision can be taken whether to accept
or reject the project. If the project is viable steps can be
taken to prepare a detailed project report and arrange
financing
 Uses of Feasibility Report

• To meet the requirements of financial

institutions. Funding institutions require a FR
before deciding on providing loans.
• To provide basic info. for effective decision
making with respect to the proposed investment.
Enables acceptance or rejection of project based
on market potential, technical and financial
implications.
• Assists in developing future plans.
• A benchmark for measuring actual performance.
 Components of a Feasibility Report
1. Introduction.
2. Description(What/Why) of the project, incl.
time table.
3. Market considerations-Preliminary evaluation
4. Promoters, Management team.
5. Technical specs and production plans.
6. Marketing Plans.
7. Financial and economic plans.
8. Risk Analysis
9. Evaluation and conclusion.
 Components of a Feasibility Report
Promoters and Management team.
• Detailed Biodata of promoters including financial
information.
• Management team(General, production,
marketing, finance)
• Consultants and specialists if any.
 Components of a Feasibility Report
Marketing and Sales.
• Basic market orientation:local ,regional ,national
or export
• Projected production volumes, prices, sales
objectives, and market share of proposed venture
• Potential customers, distribution channels.
Sources of supply.
• Competition – present and future.
• Govt. policies-Tariff protection/import restrictions
• Other critical factors.
 Components of a Feasibility Report
Technical feasibility, manpower, raw material,
environment.
• Description of Equipment/manufacturing process.
• Special technical complexities and need for
knowhow and special skills.
• Plant size and comparison with similar plants.
• Plant location in relation to suppliers, markets,
infrastructure and manpower.
• Potential equipment suppliers.
• Availability of power, water, transport,
communication.
 Components of a Feasibility Report
Technical feasibility, manpower, raw material,
environment.(contd.)
• Availability/training of manpower.(PAPs)
• Raw material availability, cost , quality.
• Import restrictions on raw materials.
• Breakdown of operating costs
• Potential environmental issues.
 Components of a Feasibility Report
Capital Investment , project financing,Returns.
• Project cost showing detailed breakup of land,
building and civil works, plant and machinery,
other fixed assets, preliminary expenses, working
capital.
• Proposed financial structure , showing sources of
equity and debt./Cost of Capital
• Projected financial statements, -profitability, IRR,
NPV, Cash flow, Balance sheer.
 What is Risk?
• Uncertainty in regard to cost , loss or damage.
• Uncertainty is the most important aspect.
• Project management abhors uncertainty.
 Participants in a Project

1. Sponsor
2. Lenders-Construction & Permanent
3. Contractor
4. Operator
5. Technology owner
6. Feedstock supplier
7. Output purchaser
8. Governments-Host and Others
9. Equity investor
10. Multilateral and bilateral agencies
Each PF participant has a different perspective on risk allocation.
Only by understanding risk perspective of participants, can its
appetite for risk acceptance be understood.
 Risk-Different Perspectives
• ‘’An event or set of circumstances that should it
occur, will have an effect on achievement of the
project objectives’’.
• Projects involve number of parties and inter-
acting activities (Areej house) .
• Each activity carries risks which may exert impact
to some extent, upon the cost, time and quality.
• Requires a risk management system which
involves identification, analysis and response.
• Failure to identify a major risk or requiring a
wrong party to assume or control a particular risk
can result in:
1. Delays in project construction and operation
schedule. (Time and cost overrun)
2. Revision of transaction documents at additional
cost.
3. Project company not able to repay the lenders.
4. Ultimately loss or abandonment of the project.
 Risk Management Process
Pre-completion or Construction Risks/Start up Risks/
IDENTIFY RISK
Post completion or Operational Risks/Common Risks

How seriously threatening?/What is the probability of

ANALYSE RISK
occurance?/ If it occurs what is the impact?

Transfer risk by allocating to one of the parties/ Transfer

MITIGATE RISK
the risk to insurers/ Retain the risk (Residual Risk)

Contracts/Agreements/Derivatives/Insurance policies
ALLOCATE RISK
 Project Risks

Construction Operations
Phase Phase
Common Risks
What are these risks and how do you
mitigate them?
 Risk Identification

1. Construction phase risks 2. Operations phase risks

a.Activity Planning a.Supply risk
b.Technological(Engg.,Design) b.Operational risk
c.Construction c.Market risk

3.Risks common to both construction and operations phases

a.Political Risk f.Interest rate risk
b.Environmental risk g.Legal risk
c.Regulatory risk h.Credit/counterparty risk
d.Public opposition to project i.Force Majeure
e.Failure to obtain permits and j.Exchange rate risk
other government approvals
 Start up Risks

• In between construction phase and operations

phase risks we have Start-up risks. Start-up of a
project is the most important risk-shifting phase
of PF.
• Achievement of performance guarantees through
performance tests signals the end of contractor
risk period and beginning of risk period for the
operator and project company.
• At start-up the contractor is required to prove that
the project can operate at a level of performance
necessary to service debt and pay operating costs
 Risk Analysis.
Key questions.
• What exactly is the risk? (JNPT crane)
• How serious is it a threat to the project?
• What is the probability of it happening?
• What is the likely impact on the project if it
happens?
• What could be done to minimise its impact on
success.
 It’s All About Risk!
• Management of risk is an important feature of project
finance ,because risk management helps determine the
viability of a project.
• The key to project financing is the reallocation of any
risk away from the lenders to the project, which is done
by a network of contracts.
• By the network of contracts the risk is allocated to
parties best suited to appraise and control them. For
example construction risk is borne by the contractor
and risk of insufficient demand for project output is
borne by the off taker.
42
 Risk Management System
From a contractual perspective.
• Allocate risk in contracts.
• Among different parties.
• In such a way as to enable risks to be managed
efficiently and effectively throughout the
construction process.
Key Question-What are the risk allocation
principles that facilitate producing the best
possible project outcome?
 Principles of risk allocation-Abrahamson
Risk shall be allocated to the party:
1. If the risk of loss is due to his own willful misconduct
or lack of reasonable efficiency or care.
2. If he can cover the risk by insurance and allow for the
premium in settling his charges , and it is the most
convenient and practical for the risk to be dealt with in
this way.
3. If the major benefit of running the risk accrues to him.
4. If it is in the interests of efficiency to place the risk on
him.
5. If due to his conduct, the loss happens to him in the
first instance and there is no reason to transfer the loss
to another.
 Examples of Risk Allocation

RISK PARTY ALLOCATED RISK MITIGATION

RISK
Cost overrun within Contractor Construction contract is for a
contractor's control fixed price
Cost overrun not within Insurance Company Insurance Proceeds
contractor's control-insured
event (War)
Cost overrun not within Developer/Sponsor Stand-by equity commitment is
contractor's control- drawn upon
uninsured force majeure
event
 Examples of Risk Allocation
RISK PARTY ALLOCATED RISK MITIGATION
RISK
Completion delay that is Contractor Fixed completion date in
within contractor's control construction contract; daily/
weekly liquidated damages
/Early completion Bonus
Completion delay that is Insurance Company Insurance Proceeds
not within contractor's
control-insured event
 Examples of Risk Allocation
RISK PARTY ALLOCATED RISK MITIGATION
RISK
Failure of contractor to Contractor Performance guarantees in
satisfy performance construction contract;
guarantees at completion liquidated damages for reduced
/commissioning due to performance payable by
contractor's fault contractor
Country Risk-expropriation Central Government pays debt and
,nationalization, Government guaranteed equity return to
interference developer.
 Map of risk allocation mechanisms in infrastructure investments
Risk identification Risk Allocation
Project Life Cycle Allocation through Contracts
1. Construction phase risks
a.Activity Planning
b.Technological(Engg.,Design) Turnkey (EPC) contracts
c.Construction
2. Operations phase risks
a.Supply risk Put or Pay agreements
b.Operational risk O & M agreements
c.Market risk Offtake agreements
3.Risks common to both
construction and operations
a.Environmental risk
b.Regulatory risk
c.Interest rate risk Use of derivative contracts
d.Legal risk Use of Insurance Policies
e.Credit/counterparty risk
f.Exchange rate risk